Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

NABL Eyes Rule on Refunding

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WASHINGTON — Bond lawyers want Congress and the Treasury Department to allow muni issuers to current refund certain tax-advantaged bonds, even after they can no longer issue the bonds under existing tax law.

The National Association of Bond Lawyers outlined its proposal in a recent letter and three-page memo sent to John Cross 3rd, Treasury’s associate tax legislative counsel, and other department officials.

The current refundings would only be permitted if they met certain conditions, the group said.

NABL members said Congress would have to enact legislation authorizing the Treasury to write a rule permitting the refundings, but they want to get the Treasury’s support first.

In a refunding, an issuer sells bonds and uses the proceeds to redeem outstanding debt that typically has higher interest rates. In a current refunding the issuer uses the refunding bond proceeds to redeem the outstanding bonds within 90 days.

NABL’s proposal would allow current refundings of taxable Build America Bonds, private-activity bonds exempted from the alternative minimum tax, and other munis even though the provisions authorizing issuance of the bonds expired. The rule would apply to current refundings of any tax-advantaged bonds that can no longer be issued, the bond lawyers said.

Meanwhile, Louisiana Treasurer John Kennedy has made a similar proposal to Treasury on a smaller scale. He is urging the department to allow the state to issue tax-exempt bonds after Jan. 1, 2012, to current refund Gulf Opportunity Zone bonds, even though tax-exempt GO Zone bonds cannot be issued after the end of 2011. He detailed his request in a two-page letter sent to Treasury Secretary Timothy Geithner on Oct. 13.

Both NABL and Kennedy said in their letters that their proposals would not lead to any additional bonds being outstanding and would benefit federal coffers by resulting in less tax-exempt interest paid to investors or, in the case of BABs, lower federal subsidy payments paid to issuers.

NABL would make the current refundings subject to two conditions. First, the amount of refunding bonds could not exceed the amount of bonds being refunded. Second, the weighted average maturity of the refunding bonds could not exceed 120% of the average expected economic life of the bond-financed facilities.

Cliff Gerber, a partner with Sidley Austin LLP in San Francisco who wrote the NABL memo, said that Congress has put provisions allowing these kinds of current refundings in some tax laws, but not in others.

“By authorizing the Treasury and the Internal Revenue Service to craft appropriate refunding transition rules to address expiring bond-related tax provisions or other changes to Internal Revenue Code affecting bonds, this provision could potentially enhance consistency in an issuer’s ability to current refund from tax act to tax act,” Gerber said. “Particularly where there is no increase in the amount of outstanding bonds and the issue’s average maturity is commensurate with the refinanced assets, it would seem to make for a pretty sympathetic case.”

Whit Kling, director of the Louisiana State Bond Commission, which approves GO Zone issues for the state, said in an interview that by Nov. 18, Louisiana will have issued virtually all of the almost $7.9 billion of GO Zone bonds it was allocated under the Gulf Opportunity Zone Act of 2005.

That law permitted the state, as well as Alabama and Mississippi, to issue private-activity bonds to finance the construction and rehabilitation of residential and nonresidential property following Hurricanes Wilma, Katrina and Rita.

Louisiana was allocated 7.84 billion of the bonds, Mississippi got $4.9 billion and Alabama received $2.42 billion. Originally the bonds had be to be issued by Jan. 2, 2011, but Congress extended that date through 2011.

Kennedy told Geithner: “Congress made it clear in the legislative history that current refundings of outstanding [GO Zone] bonds do not count against the volume cap to the extent the principal amount of the refunding bonds do not exceed the outstanding principal amount of the bonds being refunded, but did not expressly state that tax-exempt bonds issued on or after Jan. 1, 2012, to current refund [GO Zone] bonds qualify as [GO Zone] bonds.”

“Clarification that such bonds qualify as tax-exempt would be consistent with the legislative history,” he said. “Moreover, allowing refundings after Jan. 1, 2021, would not impose any cost on the government. In fact, since most refunding bonds have lower interest rates than the prior bonds, it would reduce the costs for the government and the borrower.”

Kennedy said the same issue arose a few years ago with Liberty Zone Bonds in New York City and the IRS allowed those bonds to be current refunded after they could no longer be issued. Liberty bonds were used to finance redevelopment in the area of the terrorist attacks on the World Trade Center.